NATIONAL FINANCIAL REPORTING AUTHORITY

Background:

In the wake of accounting scams, a need was felt to establish an independent regulator for enforcement of auditing standards and ensuring the quality of audits so as to enhance investor and public confidence in financial disclosures of companies. Thus, the National Financial Reporting Authority (NFRA) was constituted on 1st October, 2018 by the Government of India.

1. Elaborate the recognition of NFRA under Companies Act, 2013? 

2. Bring out the aim of Government of India for constituting NFRA? 

3. Explain the scope of NFRA? 

4. Describe the composition of NFRA? 

5. Explain the functions and duties of NFRA? 

6. What are the powers of NFRA especially in regards with right to investigation?

  1. Elaborate the recognition of NFRA under Companies Act, 2013? 

Response to Question 1.:

The National Financial Reporting Authority (NFRA) is a body comprised under the arrangements under Section 132 of the Companies Act, 2013. The formation of this authority is compelling from first October 2018.

The Union Cabinet endorsed the proposition to set-up the National Financial Reporting Authority (NFRA), planned to fill in as an Independent Regulator for inspection. After different ongoing tricks and scams like PNB fraud/scam and other monetary frauds and scamming schemes in the country, NFRA is an extremely inviting move by the current government.[1]

2. Bring out the aim of Government of India for constituting NFRA?

Response to Question 2.:

The rationale behind making NFRA was setting up of a different and autonomous administrative body to aid the outlining and requirement of enactment identifying with auditors and auditing and Improving financial backer (investors) and public trust in the monetary detailing of a substance.

Rebuilding and/or presenting new controlling authorities across the globe has been completed because of scams (especially financial scams) by taking advantage of the weak system of corporate administration and frail exposure prerequisites in accounting and auditing.

In India, making NFRA a reality occurred in the fallout of the Satyam Scam and its need was additionally featured subsequent to witnessing the recent fraud including Nirav Modi.

The non-performing assets (NPA) had emerged since a decade ago brought the auditors and auditing techniques under the scrutiny the, everyone was questioning their norms. Despite the fact that banks are dependent upon various types of Audit yet NPAs were (still are) expanding at disturbing levels.

Tax evasion on larger scale is assumed as one of the reasons in bringing the NFRA into reality.

Majority of the significant economies of the world had an autonomous auditor controller(s) and along these lines, India likewise required to be on-par with them also. At the time ICAI had liberal methodology against auditors who were accused of neglect or malpractices in past and this can be very notable.

3. Explain the scope of NFRA? 

Response to Question 3.:

NFRA has the ability to examine and furthermore direct quality audits for a specific recommended class of organizations. While the draft NFRA Rules have not been endorsed at this point, they would incorporate the accompanying class of organizations whenever executed all things considered:

Organizations recorded in India

Unlisted Organization/Companies whose:

Total assets – Rs. 500 crores; or

Settled up Capital – Rs. 500 crores; or

Yearly turnover – Rs. 1000 crore or

Organizations whose protections are recorded external India

The NFRA likewise holds the force of examination of a specific class of bodies corporate or people (inspectors) comparable to issue of expert or other wrongdoing by a part or firm of Chartered Accountants or evaluators. In such manner, according to the draft NFRA rules, the inspectors or review firms which lead the review of the accompanying classification of organizations or their branches (counting through the organization/brand to which it has a place) regardless of whether straightforwardly or in a roundabout way, are covered:

Review of – 200 organizations in a year;

Review of – 20 recorded organizations;

4. Describe the composition of NFRA? 

Response to Question 4.:

The Companies Act states that the NFRA is supposed to have a chairperson which has to be appointed by the Union Government i.e., Government of India and with 15 members as maximum capacity. The allotment of the members & chairperson is suctioned under the below qualifications:

  • They need to have expertise in accountancy, finance, auditing, or law.
  • They need to prepare a declaration to the Union Government that there is neither conflict of interest nor lack of independence in their allotment.
  • The chairman and all the members which are in full-time employment should not be in association with any kind of audit firm which also includes related consultancy firms, 2 years after the term and also during the term of office. 

5. Explain the functions and duties of NFRA? 

Response to Question 5.:

As indicated by Section 132 of Companies Act 2013, “NFRA is liable for suggesting accounting and auditing approaches and norms in the nation, undertaking examinations, and forcing sanctions against defaulting auditors and audit firms as financial punishments and debarment from practicing for as long as 10 years.”

According to Section 132 of Companies Act 2013, “NFRA is responsible for recommending accounting and auditing policies and standards in the country, undertaking investigations, and imposing sanctions against defaulting auditors and audit firms in the form of monetary penalties and debarment from practice for up to 10 years.”[2]

As per the NFRA Rules, 2018, the powers and abilities of the NFRA were reached out to evaluate the administering of auditors of companies and/or other organizations recorded for any stock trade, in India or outside of India, unlisted public companies and/or organizations over specific edges, and different organizations indicated in Rule 3 (1) in that.

Rules 7 and 8 consider the observing of auditing and accounting experts of the companies and/or organizations alluded to in Rule 3 (1).

Organizations under Rule 3 (2) and (3) are needed to unveil data of their auditors to the NFRA through structure NFRA-1.

“Pursuant to the NFRA Rules, 2018, the powers of the NFRA were extended to include the governing of auditors of companies listed in any stock exchange, in India or outside of India, unlisted public companies above certain thresholds, and other companies specified in Rule 3 (1) therein. Rules 7 and 8 allow for the monitoring of accounting and auditing professionals of the companies referred to in Rule 3 (1). Companies under Rule 3 (2) and 3 (3) are required to disclose information of their auditors to the NFRA through form NFRA-1.”[3]

Functions and Duties

As per Sub Section (2) of Section 132 of the Companies Act, 2013, the duties of the NFRA are to:

Its Suggests that accounting and auditing examining approaches and norms to be received by organizations (companies) for endorsement by the Union Government; Monitor and authorize consistence with accounting s’ and auditing s’ guidelines and inspecting principles; Oversee the nature of administration of the callings related with guaranteeing consistence with such norms and recommend measures for development in the nature of administration; Perform such different capacities and obligations as might be essential or incidental to the aforementioned capacities and obligations.

Recommend accounting and auditing policies and standards to be adopted by companies for approval by the Central Government; Monitor and enforce compliance with accounting standards and auditing standards; Oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service; Perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.”[4]

Sub Rule (1) of Rule 4 of the NFRA Rules, 2018, gives that the Authority will secure the public premium and the interests of financial backers (investors), banks and others related with the organizations or bodies corporate represented under Rule 3 by setting up excellent norms of accounting and auditing and practicing viable oversight of accounting capacities performed by the organizations and bodies corporate and examining capacities performed by inspectors (auditors).

“Sub Rule (1) of Rule 4 of the NFRA Rules, 2018, provides that the Authority shall protect the public interest and the interests of investors, creditors and others associated with the companies or bodies corporate governed under Rule 3 by establishing high quality standards of accounting and auditing and exercising effective oversight of accounting functions performed by the companies and bodies corporate and auditing functions performed by auditors.”[5]

6. What are the powers of NFRA especially in regards with right to investigation?

Response to Question 6.:

The NFRA will have the accompanying Powers under it:

To research the issue of expert or other offense submitted by a recommended class of CA firms or CAs. No other authority can start or proceed with procedures where the NFRA has started an examination. Such an examination can be started either Suo-moto (without anyone else) or on a reference made by the Central Government.

Similar forces as a Civil Court under the Code of Criminal Procedure, 1908, in regard of a suit including the accompanying issue.

  • Disclosure and creation of books of record and different reports, at such spot and time as might be determined by the NFRA
  • Calling and authorizing the participation of people and inspecting them having sworn to tell the truth
  • Assessment of any books, registers, and different reports of any individual at any spot
  • Giving commissions for the assessment of witnesses or archives

Where proficient or other offense is demonstrated, it will have the ability to force the accompanying discipline:

Punishment:

  • For people a fine between Rs. 1,00,000 to multiple times the expenses got;
  • For firms a fine Between Rs. 5,00,000 to multiple times the charges got;

Suspending the part/firm from training as an individual from ICAI between a half year to 10 years as might be chosen

Any individual who isn’t happy with the request for the NFRA would then be able to make an appeal to the Appellate Authority.

CREDITS: Raunak Shukla, Amity University, Mumbai

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[1] National Financial Reporting Authority (NFRA), Cleartax, https://cleartax.in/s/nfra, (last visited April 10, 11:35 PM)

[2] Injeti Srinivas, NFRA is a necessity, ICAI contentions are contrary to international standards; here’s why ,Financial Express, https://www.financialexpress.com/opinion/nfra-is-a-necessity-icai-contentions-are-contrary-to-international-standards-heres-why/1356439/ , (last visited Apr. 10, 2021, 11:42 PM).

[3] Lalit Rajput, Applicability and other Provisions of NFRA Rules, 2018, TAX GURU, https://taxguru.in/corporate-law/nfra.html  , (last visited Apr. 11, 2021, 12:23 AM).

[4] NFRA: About US, NFRA, https://nfra.gov.in/about-us ,(last visited Apr. 11, 2021, 12:37 AM).

[5] NFRA: About US, NFRA, https://nfra.gov.in/about-us , (last visited Apr. 11, 2021, 12:53 AM).

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